Historically, disposals of UK land held as an investment by non-UK residents were not subject to UK capital gains tax, unless the property was residential.
The UK generally taxes property trading and property investment activity differently. Whether property development is a trade or an investment is a difficult question, involving a detailed assessment of the activities and intention of the taxpayer.
Where a non-UK resident is trading, profits were historically only table where either:
- The company traded through a permanent establishment; in this case, only the profits and gains attributable to the UK permanent establishment were taxed
- The company may have a residual liability to UK income tax in respect of its UK source trading profits, even where it was not UK resident and had no UK permanent establishment (unless this was relieved by a double tax treaty) or
- The diverted profits tax legislation applied.
Accordingly, non-UK resident companies that did not have a UK permanent establishment and which were resident in a country that had a double tax treaty with the UK which prevented the residual income tax charge (by imposing a particular threshold that must be met before there was a UK permanent establishment), did not historically pay UK tax on trading or development profits.
There could be a very real practical issue as to whether, in fact, there was a UK permanent establishment or not. The Government is aware of this, and has stated that HM Revenue & Customs (HMRC) is already challenging structures where they consider there are strong arguments that there is a UK permanent establishment or a liability to diverted profits tax.